Harmonic Convergence

Harmonic Convergence
FASB Chief on Move Toward International Accounting Standards

By Simon Eskow

Continued from the Home Page

Chairman Robert Herz told a business group in April that international convergence ranks as one of FASB’s three prime objectives, along with the simplification of Generally Accepted Accounting Principles and improved financial reporting.

“Simplification because U.S. GAAP is complicated, rules-driven and hard to understand,” Herz said at an April 12 presentation at the Japan Society in New York. “We have an opportunity now to work with colleagues to not only converge but to simplify and improve GAAP, killing three birds with one stone.”

The U.S. has been investigating convergence with international standards formally for several years through its relationship with the International Accounting Standards Board (IASB), a private London-based organization that has its own body of accounting rules, known as International Accounting Standards (IAS). An increasing amount of capital crossing borders every year and a perceived need for consistent international reporting have prompted government agencies to move convergence to the front burner.

But with about 100 countries now adopting IAS, not to mention the standards’ use in large markets, such as those in Japan and the U.S., convergence promises to be a long and delicate process.

“The differences between U.S. GAAP and IAS, and between those standards and Japan’s and other standards, are many,” Herz said, adding that changes to standards require time for companies to adjust their systems. “This is not an overnight thing…it has to be thought out.”

Going Global

Herz said it may occur to some to question why the world’s biggest financial market would bother converging its standards with others, as opposed to allowing other markets to conform. But given the increasing amount of capital and investment crossing political borders, and the fact that the rest of the world may not idly stand for “Pax Americana,” the only way to create truly international standards is for the world to meet at a certain point.

“The rest of the world isn’t going to accept the standards written in Connecticut according to the American system,” said Herz, who emphasized that he was stating his opinion and not a policy position. “But if we weren’t part of the process, you couldn’t call anything that might emerge as truly international. It’s a pull and tug, so it must include the U.S. But nobody is going to just accept the U.S. reporting standard alone.”

Official encouragement to converge, such as that found in Section 108 of the Sarbanes-Oxley Act, gently prompts FASB to use convergence as a means to perfect GAAP as well.

Around the time Sarbanes-Oxley was passed, FASB entered into what is known as the Norwalk Agreement with the IASB, which set a framework for cooperation on convergence projects. Herz said the agreement includes the alignment of agendas in major areas, and taking on joint projects, such as purchase method procedures for mergers and acquisitions and revenue recognition.

Challenges to convergence obviously remain, Herz said. Standards-setting bodies are coming from different cultures and environments, making it difficult to synchronize disparate agendas. Additionally, disagreement among the participants is a continuous hazard; people generally dislike change because it often means changing the way business is done, or even a company’s business model. Finally, Herz said, there is fatigue in the wake of several years of accounting reform.

In the end, Herz expressed optimism for the convergence process and for the U.S. role in creating international standards.

“We’re not the ugly Americans; our hearts are in the right place,” Herz said. “My hope is that what we’re doing isn’t the lowest common denominator, but that it is something that is sound enough to provide high-quality reporting that works across borders.”

Herz suggested that convergence would create rules that would be somewhere between the U.S.’s rules-based system and what one audience member called the principles-based accounting of IAS.

Convergence, in any case, is at least part of the impetus of FASB’s GAAP simplification project. U.S. GAAP, Herz said, consists of 2,000 standards, written by several standards-setting bodies in various formats and to varying depths, that sometimes are contradictory. The project will attempt to codify those standards.